United States: ZTE's Court-Appointed Monitorship Comes To A Close

The largest criminal monitorship in U.S. history has ended. On March 22, 2022 a U.S. judge ruled that Chinese telecommunications giant ZTE Corporation had completed the terms of its five-year probation, which began in 2017 following ZTE's criminal plea agreement for its role in exporting controlled U.S. products to embargoed countries.

The resolution was up in the air as late as March 14, when ZTE returned to court for a hearing on whether alleged visa fraud by a former research director had violated the Chinese company's probation. In this hearing, which came just one week before the stipulated end date of the original five-year corporate compliance monitorship, the judge found that the alleged conduct in the visa fraud case did not violate the terms of ZTE's probation. Nevertheless, he "encouraged the government to pursue any reasonable charges and criminal or civil penalties against the company, especially for export compliance violations.

Background: Probation and Monitorship

ZTE's probation dates back to March 2017, when it entered into a criminal plea agreement with the Department of Justice and concurrent civil settlement agreements with the Department of Commerce's Bureau of Industry and Security ("BIS") and the Department of the Treasury's Office of Foreign Assets Control ("OFAC").

The alleged misconduct involved an elaborate scheme to illegally export-controlled U.S. products to embargoed countries, namely Iran, as well as Sudan, North Korea, Syria, and Cuba,¹ in violation of the International Emergency Economic Powers Act ("IEEPA"), Iranian Transactions and Sanctions Regulations ("ITSR"), and the Export Administration Regulations ("EAR"). Through a series of shell or "isolation" companies, ZTE entered into contracts with Iranian telecommunications companies for projects involving telecommunications infrastructure and network equipment, and products with "law enforcement surveillance function and accompanying software, the ZTEC-manufactured ZXMT system." The contracts provided for the export of items controlled under Categories 3, 4, 5, and 7 of the Commerce Control List. Neither ZTE nor its shell companies ever sought or obtained licenses from OFAC, "though they knew at the time that licenses were required." After the FBI began an investigation into ZTE's conduct, ZTE senior officials created a team of IT personnel to delete incriminating data and actively provided false information to its U.S. defense counsel, which was then relayed to U.S. government officials.

According to the plea and settlement agreements, ZTE agreed to pay the U.S. government more than $1.19 billion for alleged violations of U.S. law, to spend three years on probation, and to appoint a corporate compliance monitor – an independent, third-party officer of the court – to be tasked with ensuring that ZTE enhance (or build from the ground up) its compliance program throughout its organization, including its subsidiaries and affiliates. As we have  previously written about, a monitor is similar to a probation officer, ensuring that the organization does not reoffend or otherwise violate the terms of its probation.

The Superseding Settlement Agreement and Special Compliance Coordinator

Then in June 2018, ZTE entered into a superseding settlement agreement with BIS for violating of the initial terms of its probation by making false statements to BIS. Subsequently, the judge in the criminal case added two years to the probation, extending it to March 2022. This followed ZTE's placement on the Denied Persons List, the most severe restriction BIS can place on a person, which effectively barred ZTE from exporting any products from the United States.

The superseding settlement agreement added an additional $1 billion civil penalty to the amount ZTE already owed to the U.S. government under the 2017 plea and settlement agreements and ordered the appointment of a Special Compliance Coordinator ("SCC") – which is essentially a non-criminal export controls compliance monitor. The SCC is tasked with filing additional reports to BIS and completing annual audits of ZTE's export compliance program.

During the criminal probation, the initially appointed monitor and SCC were independent but overlapped in their oversight of ZTE's export compliance rehabilitation.

The Takeaway

As the ZTE case demonstrates, court-appointed monitorships can be a dire consequence for corporations that violate U.S. laws and regulations. They can be costly (not counting associated criminal or civil penalties), lengthy, and a huge strain on an organization's functionality, allowing for intense outside scrutiny of internal practices that can greatly affect operations. However, they are not a death sentence.

The case of ZTE demonstrates several principles for different stakeholders. Companies can take heart that if they abide by the terms of a plea or settlement agreement with the U.S. government, court-appointed monitors can  and do come to an end. And in the end, monitorships can be a valuable tool for reforming corporate malfeasance, albeit not without growing pains, by forcing improvements to the company's compliance program to avoid or prevent future misconduct and the resultant costly penalties. U.S. government regulators can take away the fact that monitorships do, in fact, improve corporate behavior and that the threat of lengthy and costly government oversight should act as a deterrent against future misbehavior.

The ultimate outcomes of ZTE's involvement in the ongoing visa fraud case and its time under the watch of the SCC, which should conclude in 2028 barring any new developments, remain to be seen. Whatever the outcome, the international business community, legal and compliance professionals, and government regulators should continue to monitor (pun intended) the case for lessons regarding compliance, monitorship, and enforcement.

Footnote

1 U.S. v. ZTE, Factual Resume, 3-17CR-0120K, (N. Dist. Tex. Mar 7, 2017), 17 (available at  https://www.justice.gov/opa/press-release/file/946281/download).

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